Difference between revisions of "Management of Liquidity Risk by IBs and IBUs"

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The [[Bangko Sentral ng Pilipinas]] (abbreviated as "BSP") has approved Circular No. 1116, s. 2021 on the '''Management of Liquidity Risk by IBs and IBUs'''.
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'''Liquidity risk''' is the risk of an IB or IBU's inability to meet its financial obligations as they come due. '''Liquidity risk management''' is an important aspect of risk management for ''[[Guidelines on the Establishment of IBs and IBUs | Islamic finance institutions, such as Islamic banks (IBs) and Islamic banking units (IBUs)]]'''.
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The Circular provides guidance on the management of liquidity risk by IBs and IBUs in the Philippines. It outlines the principles and best practices for liquidity risk management and establishes minimum standards for the management of short-term and long-term liquidity risks for IBs and IBUs.
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==Salient Provisions of the Circular==
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The key components of the Circular include the development of a comprehensive liquidity risk management framework, the implementation of appropriate measurement and monitoring tools, the establishment of adequate liquidity buffers, and the implementation of contingency plans to address potential liquidity stress scenarios. The Circular also requires that Islamic financial institutions conduct regular stress tests to assess their ability to withstand potential liquidity shocks and to regularly review and update their liquidity risk management policies and procedures.
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In addition to these specific requirements, the Circular also emphasizes the importance of effective communication and coordination between the Islamic financial institutions and the central bank to ensure the stability and soundness of the financial system.
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The Circular requires IBs and IBUs to adopt and implement a robust liquidity risk management framework that complies with the principles of Shari'ah, international best practices, and the regulations set forth by the BSP. The framework should include, but not limited to, the following components:
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#<b>Liquidity risk management policy</b>: The IB or IBU should establish a comprehensive liquidity risk management policy that outlines the principles and objectives of liquidity risk management, and the governance structure responsible for its implementation.
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#<b>Liquidity risk assessment</b>: The IB or IBU should conduct a comprehensive liquidity risk assessment to identify, measure, monitor, and manage its liquidity risk exposures. This includes forecasting and stress testing to determine the impact of various scenarios on its liquidity position.
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#<b>Liquidity risk management strategies</b>: The IB or IBU should develop and implement a range of strategies to manage its liquidity risk, including contingency funding plans, lines of credit with correspondent banks, and other liquidity management tools.
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#<b>Liquidity risk reporting</b>: The IB or IBU should have a robust reporting system in place to monitor and report on its liquidity position, including the reporting of key indicators, such as liquidity ratios and gap analysis.
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#<b>Internal control and audit</b>: The IB or IBU should have a strong internal control system in place to ensure that its liquidity risk management framework is implemented effectively, and its financial statements are accurate and reliable.
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==Relationship to the AAOIFI==
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After the issuance of this circular, the BSP signed a Memorandum of Agreement with the '''[[Accounting and Auditing Organization for Islamic Financial Institutions (AOOIFI)]]''', the international standard-setting body for Shari'ah auditing, accounting, and governance, to cover the possible adoption of relevant '''[[AAOIFI standards]]''' by the local Islamic banking and finance industry, and cooperation in the areas of capacity building and technical assistance.
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==Related Issuances==
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These guidelines were after the issuance of the '''[[Guidelines on the Establishment of IBs and IBUs | Guidelines on the establishment of Islamic banks (IBs) and separate Islamic banking units (IBUs) within conventional banks]]'''; ''[[Shari'ah Governance Framework]]'''; and the '''[[Guidelines for Reporting Islamic Banking and Finance Transactions/Arrangements]]'''.
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The '''[[Shari’ah Supervisory Board in the BARMM]]''' was established by virtue of a [[joint circular]] issued by the BSP, the [[Department of Finance]], the [[National Commission on Muslim Filipinos]], and the Bangsamoro Government.
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The [[Insurance Commission]] also issued [[Circular Letter No. 2022-04]] on the '''Baseline Regulatory Framework for [[Takaful]] Undertakings''' in 2022, while the Bureau of Internal Revenue issued '''[[Revenue Regulations No. 17-2020]]''' and '''[[Revenue Memorandum Circular No. 35-2022]]''' to implement the '''[[tax neutrality]]''' provision in the Islamic Banking Act.
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Revision as of 19:17, 9 February 2023

The Bangko Sentral ng Pilipinas (abbreviated as "BSP") has approved Circular No. 1116, s. 2021 on the Management of Liquidity Risk by IBs and IBUs.

'Liquidity risk is the risk of an IB or IBU's inability to meet its financial obligations as they come due. Liquidity risk management is an important aspect of risk management for Islamic finance institutions, such as Islamic banks (IBs) and Islamic banking units (IBUs).

The Circular provides guidance on the management of liquidity risk by IBs and IBUs in the Philippines. It outlines the principles and best practices for liquidity risk management and establishes minimum standards for the management of short-term and long-term liquidity risks for IBs and IBUs.

Salient Provisions of the Circular

The key components of the Circular include the development of a comprehensive liquidity risk management framework, the implementation of appropriate measurement and monitoring tools, the establishment of adequate liquidity buffers, and the implementation of contingency plans to address potential liquidity stress scenarios. The Circular also requires that Islamic financial institutions conduct regular stress tests to assess their ability to withstand potential liquidity shocks and to regularly review and update their liquidity risk management policies and procedures.

In addition to these specific requirements, the Circular also emphasizes the importance of effective communication and coordination between the Islamic financial institutions and the central bank to ensure the stability and soundness of the financial system.

The Circular requires IBs and IBUs to adopt and implement a robust liquidity risk management framework that complies with the principles of Shari'ah, international best practices, and the regulations set forth by the BSP. The framework should include, but not limited to, the following components:

  1. Liquidity risk management policy: The IB or IBU should establish a comprehensive liquidity risk management policy that outlines the principles and objectives of liquidity risk management, and the governance structure responsible for its implementation.
  2. Liquidity risk assessment: The IB or IBU should conduct a comprehensive liquidity risk assessment to identify, measure, monitor, and manage its liquidity risk exposures. This includes forecasting and stress testing to determine the impact of various scenarios on its liquidity position.
  3. Liquidity risk management strategies: The IB or IBU should develop and implement a range of strategies to manage its liquidity risk, including contingency funding plans, lines of credit with correspondent banks, and other liquidity management tools.
  4. Liquidity risk reporting: The IB or IBU should have a robust reporting system in place to monitor and report on its liquidity position, including the reporting of key indicators, such as liquidity ratios and gap analysis.
  5. Internal control and audit: The IB or IBU should have a strong internal control system in place to ensure that its liquidity risk management framework is implemented effectively, and its financial statements are accurate and reliable.

Relationship to the AAOIFI

After the issuance of this circular, the BSP signed a Memorandum of Agreement with the Accounting and Auditing Organization for Islamic Financial Institutions (AOOIFI), the international standard-setting body for Shari'ah auditing, accounting, and governance, to cover the possible adoption of relevant AAOIFI standards by the local Islamic banking and finance industry, and cooperation in the areas of capacity building and technical assistance.

Related Issuances

These guidelines were after the issuance of the Guidelines on the establishment of Islamic banks (IBs) and separate Islamic banking units (IBUs) within conventional banks'; Shari'ah Governance Framework; and the Guidelines for Reporting Islamic Banking and Finance Transactions/Arrangements.

The Shari’ah Supervisory Board in the BARMM was established by virtue of a joint circular issued by the BSP, the Department of Finance, the National Commission on Muslim Filipinos, and the Bangsamoro Government.

The Insurance Commission also issued Circular Letter No. 2022-04 on the Baseline Regulatory Framework for Takaful Undertakings in 2022, while the Bureau of Internal Revenue issued Revenue Regulations No. 17-2020 and Revenue Memorandum Circular No. 35-2022 to implement the tax neutrality provision in the Islamic Banking Act.

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External Links


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